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US LNG export growth from Gulf Coast draws futures contract proposal by CME and Cheniere

Houston — Exchange operator CME Group said Tuesday it was working with Cheniere Energy to develop a new futures contract for cargoes shipped from the US LNG exporter's Louisiana terminal that should reflect the physical cost of feedgas delivered to the facility, as well as the fundamentals of the global LNG market.

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The effort is designed to provide global LNG market participants with liquid and transparent forward price discovery that can be transacted upon via the physically deliverable futures contract. The key benefit of physical deliverability is that futures contract prices, by definition, converge with the physical spot market at expiration of the contract.

As more LNG is shipped overseas from the US Gulf Coast, market participants including upstream producers, gas processors, traders and consumers are trying to determine with greater precision the true value of the product on a forward basis and how much they need to hedge to mitigate their risk.

"The LNG market is evolving rapidly and will continue to evolve over the next few years as a significant amount of capacity in the US comes online," Peter Keavey, CME's global head of energy, said in a telephone interview. "What we do know is the US Gulf Coast will be a significant pricing point."

The Henry Hub in Erath, Louisiana, serves as the official delivery location for natural gas futures contracts on the New York Mercantile Exchange. Because of the proximity to its Sabine Pass terminal, Cheniere traditionally has tied its long-term commercial deals to the Henry Hub price. The exporter also ships a meaningful number of cargoes on a spot basis.

But if the Henry Hub price remains relatively stable as expected over the next decade or two and global LNG demand surges due to Asia's desire to use cleaner-burning fuels, the future price in Asia of Gulf Coast-produced LNG could still rise. That would cause a dislocation with the Henry Hub price. In that scenario, producers like Cheniere would want a futures contract that helped them maximize their netback, while other participants along the value chain would be interested in a way to improve their hedging and trading strategies.

In March 2017, IntercontinentalExchange announced that it would begin trading the first-ever US LNG futures contract, which would be cash settled against the Platts LNG Gulf Coast Marker price assessment. ICE said it would uses Platts-derived US GCM LNG forward curves for daily settlement purposes, with an initial term of 48 months. Platts JKM is the benchmark price for spot LNG in Northeast Asia. CME and Cheniere may be hoping that the price of the futures contract they develop is more reflective of the physical LNG market at expiration, therefore generating what they believe is the true value of a Sabine Pass cargo bought, sold or hedged - versus cash settling based on the ability to discover or assess where the market will be.

Keavey declined to say when the new futures contract would launch, what it might be based on, or whether it ultimately could be applied to LNG exports from other Gulf Coast terminals that soon will be coming online.

Spokespersons for S&P Global Platts and ICE declined to comment on the announcement involving CME and Cheniere.

MARKET RESPONSE TO NEW FUTURES PRODUCT MUTED

Ultimately, how the market responds to the new product remains to be seen, said Brad Leach, an energy market consultant in Connecticut who was formally responsible for natural gas and electricity research at CME.

"The geography of where Sabine Pass is located ensures a tight fit with the current Henry Hub contract," Leach said.

Further, because all Cheniere long-term sales are linked to the front month CME Henry Hub futures price, Sabine Pass sales can be directly hedged with the Henry Hub futures contract, Leach said.

Madeline Jowdy, New York-based senior director, global gas and LNG, Platts Analytics, said a transparent futures contract is an important step toward establishing a liquid trading hub in the US Gulf. But for now, she said, the CME proposal would be dominated by a single supplier, Cheniere, from a single export project, and the viability would be a function of Cheniere's commitment to the product.

"It's unclear if this particular product could develop into a larger clearinghouse for physical volumes or if something else, not influenced by Cheniere, would be preferred," Jowdy said. "When considering the US Gulf as a potential trading or pricing hub for LNG, it is critical to remember that most of the LNG consumption is occurring in Asia, and that is probably a more important factor."

--Harry Weber, harry.weber@spglobal.com, and Scott Ickes

--Edited by Richard Rubin, richard.rubin@spglobal.com